Growth at the headline level, but regional house price picture remains mixed

14 Sep 2017For discussion

There is an increasingly mixed picture across the UK housing market, according to the August 2017, UK Residential Market Survey. Although the headline level shows a return to growth, sentiment is less positive in prime central London and to a lesser extent the wider South East, alongside the North and East Anglia.

Survey in brief:

Mixed regional picture, with negative trend in prime central London in particular.

Solid growth in many regions, including Northern Ireland, North West, South West and Scotland.

National sales have not seen any growth since November 2016.

61% of respondents expect further landlords to exit the market in the next 12 months.

House prices across the regions

In the August RICS survey, 6% more respondents reported prices rising rather than falling at the headline level. However, in central London the reading is stuck firmly in negative territory, with 56% more respondents seeing a fall in prices, posting the weakest result since 2008. While sentiment also remains modestly negative in the South East, the North and East Anglia, elsewhere, the latest figures point to solid price growth in many parts, including Northern Ireland, the North West, Scotland, and the South West.

Going forward, although headline price expectations remain subdued over the next three months, at the 12-month horizon, prime central London remains the only area in which prices expectations are negative.

Interest and supply remains subdued

August saw little change at the national level to buyer enquiries with the broadly flat trend extending into its ninth straight month. Agreed sales also showed little change with 4% more respondents seeing a fall rather than rise. As such, nationally, sales have not seen any growth since November 2016.

Supply also continues to be an issue with 1% more respondents seeing a fall in new sales instructions at the national level. Although this has now turned less negative three months in a row, following such a sustained period of deteriorating sales instructions average stock levels on agents’ books are still near an all-time low.

Conversely, new instructions have increased in prime central London during four of the last six months, with a relatively large pick-up cited in both July and August. In keeping with this, the average number of properties on agents’ books in those parts of the capital has risen. By way of contrast, virtually all other regions have seen stock levels decline over the same period.

Investment properties

The August survey contained an additional question to ascertain whether respondents, in the light of policy changes, felt more landlords would enter or exit the market going forward. Nationally, 61% felt landlords would exit the market over the coming year, while only 12% felt there would be a greater number of entrants. Moreover, for the next three years, 52% felt there would be a net reduction in landlords, with only 17% suggesting a rise.

Given the likely resulting supply and demand mismatch in this area, respondents predict that over the next five years rental growth will outpace that of house prices, averaging 3%, per annum (against 2% for house price inflation).

The latest results continue to suggest that the greatest pressure on both prices and activity continues to be felt in prime central London market. Although there are some signs that the wider South East is also losing some momentum, anecdotal evidence suggests the impact is very location specific. Meanwhile the numbers for most other parts of the country point to a rather more resilient marketplace.

It is interesting that over the medium term, the conclusion of the latest survey is that rental growth is likely to outpace increases in house prices. Although the Build to Rent offer is now stepping up a gear, there clearly is some doubt as to whether it can do so at a fast-enough pace to address the shortfall which may result from the more hostile environment for Buy-to-Let investors.

Regional focus:

Northern Ireland housing market buoyant in contrast to parts of the UK

Main findings:

The headline price balance for Northern Ireland was +51% in the latest survey, meaning that 51% more surveyors said that prices rose in the past three months than those who said they fell.

The price expectations balance, at +39%, rebounded from a more modest reading the previous month. Meanwhile, sales expectations data (+61%) is also the most positive in the UK.

The new buyer enquiries balance was positive for the 12th month in succession at +36%. The new instructions to sell balance was +19% in August — the most positive in four months, but coming off a low base.

In terms of newly agreed sales, the net balance was +28% in August (compared with +11% in July).

Northern Ireland’s housing market remained buoyant in August. This follows the trend in the wider economy, with key indicators reporting that Northern Ireland business activity grew strongly last month.

Northern Ireland recorded the strongest growth across the UK for house prices, with respondents also more upbeat on the outlook. However, anecdotal evidence from respondents suggests that there is a divergence between the upper and lowers ends of the market, with a stronger picture below the £250,000 price mark.

Overall, the latest survey points a positive picture in terms of the trajectory of activity and the outlook. As ever, though, there are markets within markets. Different parts of Northern Ireland are more buoyant than others and there are variations between different property types and levels of the market. The latest NI Residential Property Price Index highlights this, with new build homes rising significantly faster than that of existing or resold housing stock, and average prices in rural areas up 6.3% in the past year, compared to 3.7% for urban areas.

This is the latest piece of strong economic data for Northern Ireland, following the Ulster Bank PMI for August, which recorded the strongest rate of private sector output growth this year. There are no doubt challenges in the economy, including rising inflation, but the latest survey highlights that people continue to want to own their own home and that the outlook for the market amongst surveyors remains quite upbeat.

Welsh surveyors remain optimistic

Main findings:

The headline price balance for Wales was +26% in the latest survey, meaning that 26% more surveyors said that prices rose in the past three months than those who said they fell.

The price expectations balance, at +12%, remains in positive territory, as does the sales expectations balance at +26%.

The new instructions to sell balance was at +31%, suggesting that there was an increase in the number of new properties coming onto the market. Meanwhile, new buyer enquiries increased according to a net balance of +47% of Welsh surveyors, and the newly agreed sales balance increased to +13%.

House prices in Wales rose solidly in August and buyer interest continues to pick-up. Welsh surveyors also remain relatively upbeat about the prospects for the market, with surveyors, on balance, pointing to price rises and an increase in sales activity over the next three months.

On the supply side, instructions to sell increased last month (a net balance of +31% of respondents saying that they rose), however they aren’t keeping pace with new buyer enquiries (+47%). This suggests that the supply challenges that have characterised the market in recent times continue to persist.

Buyer confidence remains quite strong, particularly for 2/3-bedroom properties. An increase in the number of properties coming to the market is welcome, but our experience is that supply continues to be outstripped by demand. One of the things that we have experienced is delays in the completion of sales due to lending institutions and professionals not being prepared for the higher levels of volume than had been expected.

Demand remains strong for residential properties in Scotland, but there are concerns the market is being “restricted” by the effect of the Land and Buildings Transaction Tax. Professionals in the sector reported the tax was having a “significant impact on the £500k-plus market”.

Elsewhere, property professionals reported strong market demand, with high confidence that prices will continue to rise in the next quarter.

A number of respondents indicated that the LBTT framework continues to dampen market activity in the middle house price bracket and above. Whilst transactions, which are a component part of activity, at this level are still going through, buyer enquiries and sales instructions are flat-lining, and this continues to be a concern of RICS professionals acting in this arena. The Scottish Government has proposed an LBTT Bill in this year’s Programme for Government, and in its current form it will provide a useful tidying up of current legislation surrounding the Additional Dwelling Supplement (ADS).

However, prior to this bill be tabled, the Scottish Government should fully assess the impact that the current tax bands are having on market fluidity across the price brackets. They may also wish to consider whether they can use the LBTT regime as an economic lever to optimise Scottish housing market activity through, for example, exploring the impact that exemptions for downsizers and those purchasing regenerated empty properties, of which there are 34,000 in Scotland, could have.

Meanwhile, across the UK, the supply of properties continues to be an issue, with 1% more respondents seeing a fall in new sales instructions at the national level. Although this has now turned less negative three months in a row, following such a sustained period of deteriorating sales instructions average stock levels on agents’ books are still near an all-time low.

The August survey contained an additional question to ascertain whether respondents, in the light of policy changes, felt more landlords would enter or exit the market going forward. Nationally, 61% felt landlords would exit the market over the coming year, while only 12% felt there would be a greater number of entrants. Moreover, for the next three years, 52% felt there would be a net reduction in landlords, with only 17% suggesting a rise.

Comments (1)

The view from RICS

The number of landlords exiting the market due to recent policy changes is concerning, especially given house price rises. A functioning private rented sector is crucial to a healthy housing market and it’s predicted that over 20% of all households will be PRS by 2020. The sector is extremely diverse, including many one home landlords. RICS is part of a sector wide collaboration developing a revised industry-led PRS Code of Practice, to raise standards for both consumers and landlords, bring clarity to those already in the market on various policy measures, and encourage landlords back into a professionalised market.